VTech Releases 2018/2019 Interim Results

Estimated reading time: 15 minutes

VTech Holdings Limited announced its results for the six months ended 30 September 2018, reporting continued growth in Asia Pacific despite lower Group revenue.

"In the first six months of the financial year 2019 the Group's revenue and profit decreased. The lower-than-expected results were due to the overall weak performance of the Group's telecommunication products and the logistics issues in continental Europe for electronic learning products. There was, however, good progress in Asia Pacific, where VTech continues to expand its presence. The Group also maintained market leadership in its core product areas," said Mr Allan Wong, Chairman and Group CEO of VTech Holdings Limited.

Results and Dividend

Group revenue for the six months ended 30 September 2018 decreased by 3.5% to $1,003.5 million, owing to lower sales in North America, Europe and Other Regions, which offset growth in Asia Pacific.

Profit attributable to shareholders of the Company declined by 13.0% to US$90.1 million, attributable to lower revenue and higher costs.

Basic earnings per share were 13.1% lower at US35.8 cents, compared to US41.2 cents in the first six months of the previous financial year.

The Board of Directors has declared an interim dividend of US17.0 cents per ordinary share, unchanged from the interim dividend declared in the corresponding period last year.

Costs

The Group's gross profit margin in the first six months of the financial year 2019 decreased to 29.5%, from 32.3% in the corresponding period last year. The decline was mainly due to product mix, higher materials prices, as well as an increase in direct labour costs and manufacturing overheads, which offset the positive impact of further productivity gains.

US-China Trade Tensions

During the first half of the financial year 2019, the US Government imposed three rounds of tariffs on Chinese imports amounting to US$250 billion of goods. Neither VTech's electronic learning products (ELPs) nor its telecommunication (TEL) products are included in the list of items targeted. However, the tariffs affect some of the Group's contract manufacturing services (CMS) customers in cases where they export products manufactured in VTech's facilities in mainland China to the US. As a contingency, the Group is offering such customers the alternative use of its recently acquired production facilities in Malaysia, should they wish to take advantage of the different location.

Segment Results

North America

Group revenue in North America fell by 5.9% to US$470.1 million in the first six months of the financial year 2019. Lower sales of TEL products and CMS offset higher sales of ELPs during the period. North America remained VTech's largest market, accounting for 46.8% of Group revenue.

ELPs revenue in North America rose by 9.6% to US$210.9 million, with growth in both standalone and platform products. The increase resulted from strong sales in Canada and good growth in the US. This was achieved despite the closure of Toys"R"Us in the US, as the Group's existing customers expanded their shelf space and assortment of toys to capture the business previously conducted by the retailer. Furthermore, the positive reception of new VTech and LeapFrog branded products allowed the Group to consolidate its market leadership. During the first nine months of the calendar year 2018, the Group maintained its position as the number one manufacturer of electronic learning toys from infancy through toddler and preschool in the US and Canada(1).

Growth in standalone products was led by sales increases of both VTech and LeapFrog branded products. For the VTech lines, higher sales of infant and preschool products, the Kidi line and Kidizoom Camera offset lower sales of the Go! Go! Smart family of products. Among the new standalone products launched, Chase Me Casey and Stroll & Discover Activity Walker™ sold particularly well. Strong growth of LeapFrog products also reflected higher sales of infant and preschool products. This follows efforts by the Group to support the LeapFrog brand through the launch of new learning toys such as Learning Friends 100 Words Book™ and Go-with-Me ABC Backpack.

Platform products also registered higher sales during the period, with growth across both brands. VTech saw higher sales of Kidizoom Smartwatch DX2 and KidiBuzz, while in August 2018, the new Explore and Write Activity Desk hit the market, an update of the popular Touch and Learn Activity Desk. Growth in the LeapFrog brand was driven by higher sales of both reading systems, including the newly launched LeapStart 3D, and children's educational tablets. There was also a sales contribution from LeapFrog Academy, which was introduced to the major English-speaking countries in August 2017.

During the six months, the Group's ELPs received more than 70 awards from toy and parenting industry experts, key retailers and toy advisory boards in the US. Among the major awards, Kidi Star Karaoke Machine™ was included in Amazon.com's "Top 100 Holiday Toys 2018", while Explore and Write Activity Desk made Walmart's "Top Rated Toys by Kids" list. In another important award, Learning Friends 100 Words Book and LeapStart 3D were both winners of National Parenting Product Awards (NAPPA). They were also named to the "TTPM Most Wanted List" of hot holiday toys.

TEL products revenue in North America decreased by 21.2% to US$131.3 million. Residential phones, commercial phones and other telecommunication products registered lower sales. During the period, VTech continued to maintain its leadership position in the US residential phones market(2).

Sales of residential phones were lower during the period, as the fixed-line telephone market in the US continued to contract. Loss of shelf space in the club channels also contributed to the sales decline.

Sales of commercial phones and other telecommunication products were lower, as higher sales of hotel phones and wireless monitoring systems were unable to compensate for lower sales of baby monitors and VoIP (Voice over Internet Protocol) phones. Sales of hotel phones rose as VTech continued to win more new hotel projects, while wireless monitoring systems benefited from the launch of new Wi-Fi cameras. Sales of baby monitors decreased due to inventory adjustment by a major customer. Sales of VoIP phones remained low primarily due to delay of the new VoIP phone series, which began shipping in September. The first in the series is a high-end model featuring a large, high-resolution colour display, with a second display to support paperless programmable function keys. Sales of headsets held steady during the period.

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